Some people think of this as a daunting and complex task. Well the task is very daunting, it takes a very long time and huge amount of work and effort, but its not terribly complex. Let me explain.
What do you need to do in order to retire? The basic idea is to simply cover your expenses in some way. So in the simplest example, someone walks up to you tomorrow and say’s I’ll hand you a check for all of your expenses going forward… you’re basically ready to retire!
That’s not going to happen so you need to figure how to effectively get the same thing done with other sources. There are basically 3 categories that help you get to that point.
1 – Expense Reduction – Reduce the number you need to cover
- Reduce your expenses by living more frugally (you’ll eliminate your commute, maybe only need one car, less taxes to pay, etc. etc.)
- Reduce your expenses by paying off things like your mortgage and other debt. (Your mortgage can be up 20 – 30% of your monthly expenses!)
2 – Other Sources of Steady Income – A paycheck when you’re not working
- Social security (this could be $1500 – $2500 a month)
- Additional income (like net rent from a property or some part-time work you do while your “retired”)
3 – Your Savings – use your savings and investments to pay for whatever is left
- General savings and investment
That basically covers it. Those are your building blocks. Each person’s situation will use those building blocks in different ways and of course there are risks and uncertainties that come with each. So the best plans will overshoot the target a bit just to give the person some wiggle room.
So a retirement formula in its simplest form is –
(Current Budget) – (expense reductions) <= (Sources of Income) + (Your sustainable savings spending rate)
Maybe we can dig further into each one of these categories in more depth.